Monday, May 9, 2016

The Future of American Growth

Robert J Gordon is a distinguished macroeconomist and economic historian at Northwestern University.  His latest work is aptly titled "The Rise and Fall of American Growth", a masterly treatise of 762 pages (2016, Princeton University Press). Filled with data, charts, and graphs, the book is as well-researched as one can ever expect from a scholar of such eminence.


The central thesis of Gordon's work is elegantly simple: for seven centuries, starting at 1300, the growth rate was fairly constant at around 0.2% per year (refers primarily to Britain and its colonies). When the USA became the dominant force in the global economy, the level shot up to 2.0% thanks mainly to some of the most wonderful inventions of the last one hundred years - electricity, centralized water supply and sanitation, the internal combustion engine leading up to the automobile, mass transportation systems, chemicals and pharmaceuticals that conquered many diseases, and the sociological impact of women entering the workforce and providing a mighty push to growth due to productivity. Thus, the seventy years from 1870 provide an important baseline for us to appreciate the impact or otherwise of recent changes. Incremental innovations in every sphere sustained the growth rate and made it possible for almost every American to realize the "American Dream." With per capita GDP exceeding $40,000, the nation pretty much reached its zenith in the last quarter of the 20th century. Hypothetically, if the same rate of growth (2.0%) is sustained for the next seventy years, GDP per capita would be in excess of $100,000.


Before you feel delighted at this projection, Gordon provides the warning. Recent innovations, including the much touted information technology and mobile communications, have been unable to produce the same impact as the great innovations preceding them. Automation is a double-edged sword. It may appear to improve individual productivity. However, it has reduced overall productivity by rendering many jobs redundant. In fact, a large body of work exists predicting that the development in areas such as the Internet of Things (IOT), Design Thinking, and Information Networks has the potential to render over one billion jobs redundant over the next decade.


Gordon argues with logic that is hard to dismiss why a 2.0% growth is not sustainable. He has identified four "Headwinds" that will pull the rate of growth back. These are changing demographics (what, by the way, is the new retirement age?), the skewed and fundamentally flawed model of education that was designed for the first industrial revolution and that we are reluctant to change, the crippling level of debt the seriousness of which seems to escape almost everyone who matters, and rising inequality (yes, despite everything, 99% of the people will still have just 1% of the wealth). Gordon estimates that the headwinds will effectively mean a net growth of 0.2% per year, the same level that existed for 700 years. Finally, Gordon challenges the young people of today to come up with transformational innovations in the manner that the work of Bell, Edison, and the Wright Brothers changed the world in the 20th century.

Reviewing the book for the New York Times, Paul Krugman concludes: "This is a book well worth reading - a magisterial combination of deep technological history, vivid portraits of daily life over the past six generations, and careful economic analysis. This book will challenge your views about the future. It will definitely transform how you see the past." Many others have called it "a landmark" and "a tremendous achievement."

Of course, if you feel all this discomforting, you can settle for Klaus Schwab's The Fourth Industrial Revolution (2016, World Economic Forum 198 PP). Schwab is the founder and executive chairman of the World Economic Forum and has been at the center of global affairs for 45 years. (The Economist calls the forum an annual circus but that is another story). With hardly any data and without a shred of evidence, Schwab would have us believe that 3-D printing, self-driving cars, robots, and neuro-technological advancements are about to make this world a planet of milk and honey.  As one reviewer has pointed out, the book is "badly misconceived" a phrase that I don't quite understand.


There you have the choices for the week. Either you can pick a heavy (in more senses than one), well-researched book that forces you to think about the choices we make every day, or a breezy easy-to-read fantasy about a utopian future.

Either way, do write in to say what you think.


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